Nokia’s New Chief Faces Culture of Complacency

Monday

Sep 27, 2010 at 5:09 AM

As Stephen Elop takes over at Nokia, he must regain its lost ground in smartphones and maintain its dominance as the largest maker of mobile phones.

KEVIN J. O’BRIEN

A few years before Apple introduced the iPhone, research engineers at Nokia prepared a prototype of an Internet-ready, touch-screen handset with a large display, which they thought could give the company a powerful advantage in the fast-growing smartphone market.

The prototype was demonstrated to business customers at Nokia’s headquarters in Finland as an example of what was in the company’s pipeline, according to a former employee who made the 2004 presentation in Espoo.

But management worried that the product could be a costly flop, said the former employee, Ari Hakkarainen, a manager responsible for marketing on the development team for the Nokia Series 60, then the company’s premium line of smartphones. Nokia did not pursue development, he said.

“It was very early days, and no one really knew anything about the touch screen’s potential,” Mr. Hakkarainen explained. “And it was an expensive device to produce, so there was more risk involved for Nokia. So management did the usual. They killed it.”

As Nokia’s new chief executive, Stephen Elop, takes over this month, he faces a formidable task: to regain the company’s lost ground in the smartphone segment of the global phone market, especially in the United States, while maintaining its worldwide dominance as the largest maker of mobile phones.

His biggest obstacle, according to Mr. Hakkarainen, as well as two other former employees and industry analysts, may well be Nokia’s stifling bureaucratic culture. In interviews, Mr. Hakkarainen and the other former employees depicted an organization so swollen by its early success that it grew complacent, slow and removed from consumer desires. As a result, they said, Nokia lost the lead in several crucial areas by failing to fast-track its designs for touch screens, software applications and 3-D interfaces.

In 2004, one said, the company rejected an early design for a Nokia online applications store — an innovation that Apple, Nokia and other handset makers adopted three years later. Nokia also did not improve its Symbian operating system, needed to support a more sophisticated smartphone. And though it introduced the industry’s first touch-screen devices in 2003 — the 6108 and 3108 phones, which worked with a stylus — it did not perfect the technology to fingertip precision before Apple did.

Nokia still lacks a convincing response to the iPhone. Last week it announced that software errors would delay shipments of its long-awaited N8 touch-screen phone.

A Nokia spokeswoman, Arja Suominen, declined to address any specific criticisms by the three former employees, playing down their roles. They were, she said, “managers with individual roles or leaders of small teams.”

She also said that Mr. Elop, 46, a Canadian who had run Microsoft’s business software division, and the first non-Finnish chief executive, would not give interviews yet. He began work on Sept. 21, and is spending his first weeks meeting with Nokia employees, suppliers, phone operators and software developers.

“I am sure there are things we could have done better and innovations we missed,” Ms. Suominen added. “But that happens to all companies. We have been very successful with some other innovations.”

She cited Nokia’s large patent portfolio and its 770 Internet Tablet, a compact, flat-screen device without a phone, released in 2005. It worked with a pen stylus and was made for Internet browsing but is no longer sold.

Henry Tirri, who leads Nokia’s long-term research unit, mentioned the development of Chinese character recognition, a social networking service for India and software that makes panoramic photos from a series of images. None have been matched by rivals, he said. But none have been game changers, as the iPhone was.

Mr. Tirri, whose unit has about 600 employees at 12 sites worldwide, said the company was trying to change its culture. “We have made a real effort to transform and open the research channels” since 2004, he said.

As of June, Nokia controlled 40.3 percent of the worldwide market for mobile phones, down from 40.7 percent a year earlier, according to Strategy Analytics, a research firm. That global share has remained relatively constant over the last decade.

But in the United States, its share has slipped from 35 percent in March 2002 to 8.1 percent in April, according to comScore, a provider of digital market intelligence based in Reston, Va. It has offset the decline in the United States, with growth in China, Asia and elsewhere.

The decline in the United States is mostly because of the rise of the smartphone competitors, like Apple, Research in Motion and Samsung. And the biggest profits are attributable to the most advanced devices.

Apple delivers consistently higher profit margins than Nokia.

Still, Nokia is on track this year to sell more than 70 million smartphones worldwide; Apple sold 33 million iPhones in the year through June 26.

“Nokia in a sense is a victim of its own success,” said Jyrki Ali-Yrkko, an economist at the private Research Institute of the Finnish Economy. “It stayed with its playbook too long and didn’t change with the times. Now it’s time to make changes.”

Founded in 1865 as a paper mill, Nokia is a source of national pride in Finland. With a work force of 129,000, it is by far the country’s largest private employer, accounting for 1.6 percent of the gross domestic product and more than 10 percent of exports.

In the last five years, Nokia has built a more international research staff, but most board members are Finnish and Nokia’s character remains so.

Critics have often blamed Nokia’s Symbian operating system for the company’s failure to pull ahead in smartphones, saying it is so clunky that developers have not been willing to write applications for it.

Kai Nyman, Nokia’s former chief architect for enterprise domain strategy, a unit responsible for Internet services, said his team’s job was to improve the operating system for smartphones.

He knew about the Internet-ready, touch-screen prototype, he said, although he never saw it and was not at the 2004 demonstration. But he suggested that management had been reluctant to proceed because of concerns over the performance of the operating system, and that the company was too cautious.

“There were plenty of years to make Symbian better,” said Mr. Nyman, who was at Nokia from 1983 to 2009, and took early retirement. “We could have rewritten the whole code several times over. We had the resources and the people. But we didn’t do it.”

Juhani Risku, a manager who worked on user interface designs for Symbian from 2001 to 2009, said his team had offered 500 proposals to improve Symbian but could not get even one through.

“It was management by committee,” Mr. Risku said, comparing the company’s design approval processes to a “Soviet-style” bureaucracy. Ideas fell victim to fighting among managers with competing agendas, he said, or were rejected as too costly, risky or insignificant for a global market leader. Mr. Risku said he had left in frustration at its culture; he now designs environmentally sound buildings.

Mr. Risku also said that in 2002, he proposed a 3-D user interface for Symbian handsets, which at the time would have been unique to Nokia. He said his plan had been rejected because the software would have added $2.05 in production costs to each handset.

Samsung and LG introduced the first phones with a 3-D user interface in 2009. Nokia sold the N-95 handset with 3-D graphics in 2006 and has said it might offer a full 3-D interface for this year’s holiday season.

Mr. Hakkarainen, the manager on a smartphone development team, said that in 2004, his team developed the early design for a Nokia online applications store.

“We demonstrated it within Nokia and said this is what we needed,” said Mr. Hakkarainen, who worked at Nokia from 1999 through 2007. “We tried to convince middle and upper management. But there was no way.”

He also described a highly bureaucratic corporate culture, in which proposals were screened by interlocking management committees with authority to block ideas under consensual rules for decision making.

Proposals were often rejected because their payoffs were seen as too small, he said. But “successful innovations often begin small and become very big.”

He said he had left the company to write. “Behind the Screen,” his chronicle of the company’s successes, was published in 2009.